PETITIONER:
IMPERIAL CHIT FUNDS (P) LTD.
Vs.
RESPONDENT:
INCOME TAX OFFICER, ERNAKULAM
DATE OF JUDGMENT: 19/03/1996
BENCH:
PARIPOORNAN, K.S.(J)
JEEVAN REDDY, B.P. (J)
CITATION:
1996 AIR 1887 JT 1996 (3) 410
1996 SCALE (3)20
ACT
HEADNOTE
JUDGMENT
JUDGMENT PARIPOORNAN. J. 1. The appellant herein is M/s. Imperial Chit Funds Private Limited, a company in liquidation, represented by the Official Liquidator, High Court of Kerala. The respondent is the Income Tax Officer, Ernakulam (the Revenue). The Liquidator has filed this appeal from the order passed by a Full Bench of the High Court of Kerala dated 10.8.1978 and rendered in report No. 53 in C.P. No. 7 of 1973. In the said report the Official Liquidator prayed that orders may be passed holding that income tax claimed by the revenue is not payable at that stage, and that the Income Tax Officer should wait and prove his claim before the Official Liquidator when the list of creditors is settled. The Full Bench, by the judgment appealed against, negatived the said prayer made by the Official Liquidator in his report. It is against the aforesaid judgment the Official Liquidator representing the Imperial Chit Funds Private Limited has come up in appeal. 2. The Imperial Chit Funds Pvt. Ltd. is a private company. It was wound up as per orders passed by the High Court dated 1.6.1973 in C.P. No. 7 of 1973. After the commencement of the winding up proceedings the Income Tax Officer finalized the assessment of the company for the year 1972-73 by his order dated 31.3.1975. He assessed the company to income tax in the sum of Rs.934/- and levied an interest of Rs. 93/- payable under Section 220(2) of the Income-tax Act. The total amount thus payable was Rs. 1,027/-/-. The Official Liquidator intimated the Income Tax Officer by his letter dated 8.5.1975 that the tax and interest constituted debt provable in the winding up proceedings. He stated that he was not in a position to pay the amounts straightaway. According to the Liquidator, the tax was due and payable within 12 months before the relevant date mentioned in Section 530 (8) (c) of the Companies Act and so, Section 530 (1) (a) of the said Act will not apply to the instant case. The Income Tax Officer the above intimation of the Official Liquidator. He issued a certificate to the Tax Recovery Officer and by his letter dated 8.12.1976 demanded a sum of Rs.1,027/- to be paid immediately. A notice of demand was accordingly issued. He also wrote to the Official Liquidator by communication dated 15.1.1977 for payment of the amount as per the notice of demand. Thereupon the Official Liquidator filed report No.- 53 dated 20.1.1977, seeking appropriate directions of the Court to the effect that the tax claimed is not payable at that stage, and that the Income Tax Officer should wait and prove his claim, when the list of creditors is settled. The learned Company Judge took the view that an important question arises for consideration, namely, whether the legal effect of Section 178 of the Income-tax Act is that the Income Tax Officer is entitled to the payment of the tax demanded otherwise than as provided in the Companies Act. He also referred to an earlier Division Bench decision of the High Court of Kerala rendered in A.S. No. 224/1968 wherein it was held that the amounts set aside under section 178 of the Income-tax Act will not be available for distribution in accordance with the provisions of the Companies Act and, therefore, there was no question of any priority in the distribution of assets. In view of some subsequent decisions, the learned Company Judge felt considerable doubt about the correctness of the aforesaid decision and referred the matter for being heard by a Division Bench. The Division Bench of the High Court of Kerala before whom the matter came up, by order dated 27th June, 1977 referred the matter to a Full Bench for decision and accordingly the matter was finally heard and decided by a Full Bench. The judgment of the Full Bench is reported in 116 ITR 176 (F.B.). 3. We heard Counsel for the appellant Mr. K. John Mathew and Senior Counsel for the respondent-Revenue Mr. J. Ramamurthy. The sole question that arises for consideration in this case is, whether section 178 of the Income-tax Act affects or alters the existing law so priority or overrides the provisions of preferential payment provided in Section 530 of the Companies Act. There are conflicting decisions on this point. A learned single Judge of the High Court of Kerala, in Income Tax Officer, Ernakulam vs Indian Traders Bank Ltd. (In Liquidation), 1968 KLT 595, took the view that Section 178 of the Income-tax Act does not affect the scheme of priority in Section 530 of the Companies Act, but, the amount "set aside" under Section 178 of the Income Tax Act will not be available for distribution in accordance with the provisions of the Companies Act and should be first applied to the satisfaction of the tax liability and gets priority over other debts of the Company, in the same way, as a secured creditor, who stands outside the winding up. The said decision was affirmed in appeal by a Division Bench in A.S. No. 225 of 1968. A Division Bench of the Andhra Pradesh High Court in Income Tax Officer. B. Ward. Company circle, Hyderabad v. Official Liquidator, 101 ITR 470, has taken the same view. On the other hand, the High Courts of Mysore, Calcutta, Rajasthan, Gujarat and Delhi, in the decisions reported in Income-Tax Officer. Company Circle. Bangalore v. Official Liquidator. Mysore High Court and Others, 63 ITR 810 (Mysore), Official Liquidator, High Court, Calcutta v. Commissioner of Income-Tax, 80 ITR 108 (Calcutta), Commissioner of Income Tax (central), New Delhi. and Another v. Official Liquidator. Golcha Properties (Pvt.) Ltd.. (In Liquidation), and Another, 95 ITR 488 (Rajasthan), Baroda Board & Paper Mills Ltd. (In Liquidation) v. Income- Tax Officer, Circle I. Ward-E, Ahmedabad. and Others, 102 ITR 153 (Gujarat), Income-lax Officer. Company Circle XVII, New Delhi, and Others v. Narula Finance P. Ltd. (In Liquidation), 114 ITR 645, and Income-Tax Officer, District II(2) Additional, New Delhi v. Official Liquidator. National Conduits (P) Ltd.. 128 ITR 228 (Delhi) have taken a contrary view and have held, that the provisions of Section 178 of the Income-tax Act do not affect or alter the existing law of priority and does not override the provision for preferential payment contained in Section 530 of the Companies Act. (Incidentally, we may state that the decision of Gujarat High Court reported in 102 ITR. 153 was reversed by this Court in the decision reported in 189 ITR 90, on some other aspect and the same is not relevant herein.) The sole question for our consideration is, which of the rival views is correct. 4. In order to appreciate the controversy in question, it will be useful to bear in mind the relevant provisions of the Income-tax Act, 1961 and the Companies Act, 1956. The relevant provisions are extracted hereinbelow:
Income-tax Act. 1961
"178. Company in liquidation.-- (1)
Every person-
(a) who is the liquidator of any
company which is being wound up,
whether under the orders of a court
or otherwise; or
(b) who has been appointed the
receiver of any assets of a company
(hereinafter referred to as the
liquidator) shall, within thirty
days after he has become such
liquidator, give notice of his
appointment as such to the
Assessing Officer who is entitled
to assess the income of the
company.
(2) The Assessing Officer shall,
after making such inquiries or
calling for such information as he
may deem fit, notify to the
liquidator within three months from
the date on which he receives
notice of the appointment of the
liquidator the amount which, in the
opinion of the Assessing Officer,
would be sufficient to provide for
any tax which is then, or is likely
thereafter to become. Payable by he
company.
(3) The liquidator-
(a) shall not, without the leave of
the Chief Commissioner or
Commissioner, part with any of the
assets of the company or the
properties in his hands until he
has been notified by the Assessing
Officer under sub-section (2); and
(b) on being so notified, shall set
aside an amount equal to the amount
notified and, until he so sets
aside such amount shall not part
with any of the assets of the
company or the properties in his
hands:
Provided that nothing contained in
this sub-section shall debar the
liquidator from parting with such
assets or properties for the
purpose of the payment of the tax
payable by the company or for
making any payment to secured
creditors whose debts are entitled
under law to priority of payment
over debts due tc Government on the
date of liquidation or for meeting
such costs and expenses of the
winding up of the company as are in
the opinion of the Chief
Commissioner or Commissioner
reasonable.
(4) If the liquidator fails to give
the notice in accordance With sub-
section (1) or fails to set aside
the amount as required by sub-
section (3) or parts with any of
the assets of the company or the
properties in his hands in
contravention of the provisions of
that sub-section, he shall be
personally liable for the payment
of the tax which the company would
be liable to pay:
Provided that if the amount of any
tax payable by the company is
notified under sub-section (2), the
personal liability of the
liquidator under this sub-section
shall be to the extent of such
amount.
(5) Where there are more
liquidators than one, the
obligations and liabilities
attached to the liquidator under
this section shall attach to all
the liquidators jointly and
severally.
(6) The provisions of this section
shall have effect notwithstanding
anything to the contrary contained
in any other law for the time being
in force."
(Emphasis supplied)
Provisions of the Companies Act.
1956
"Suits stayed on winding up order.
446. (1) When a winding up order
has been made or the Official
Liquidator has been appointed as
provisional liquidator, no suit or
other legal proceeding shall be
commenced, or if pending at the
date of the winding up order, shall
be Proceeded with, against the
company, except by leave of the
Court and subject to such terms as
the Court may impose.
(2) The Court which is winding up
the company shall, notwithstanding
anything contained in any other law
for the time being in force, have
jurisdiction to entertain, or
dispose of-
(a) any suit or proceeding by or
against the company;
(b) any claim made by or against
the company (including claims by or
against any of its branches in
India);
(c) any application made under
section 391 by or in respect of the
company;
(d) any question of priorities or
any other question whatsoever,
whether of law or fact, which may
relate to or arise in course of the
winding up of the company;
whether such suit or proceeding has
been instituted, or is instituted,
or such claim or question has
arisen or arises or such
application has been made or is
made before or after the order for
the winding up of the company, or
before or after the commencement of
the Companies (Amendment) Act,
1960.
(3) Any suit or proceeding by or
against the company which is
pending in any Court other than
that in which the winding up of the
company is proceeding may,
notwithstanding anything contained
in any other law for the time being
in force, be transferred to and
disposed of by that Court."
"Effect of winding up order.
447. An order for winding up a
company shall operate in favour of
all the creditors and of all the
contributories of the company as if
it had been made on the joint
petition of a creditor and of a
contributory."
"Custody of company’s property.
456. (1) Where a winding up order
has been made or where a
provisional liquidator has been
appointed, the liquidator or the
provisional liquidator, as the case
may be, shall take into his custody
or under his control, all the
property, effects and actionable
claims to which the company is or
appears to be entitled."
"Distribution of property of
company.
511. Subject to the provisions of
this Act as to preferential
payments, the assets of a company
shall, on its winding up, be
applied in satisfaction of its
liabilities Pari passu and, subject
to such application, shall, unless
the articles otherwise provide, be
distributed among the members
according to their rights and
interests in the company.
Inserted by the Companies
(Amendment) Act, 1985:
"Overriding preferential payments.
529. (1) Notwithstanding anything
contained in any other provision of
this Act or any other law for the
time being in force, in the winding
up of a company-
(a) workmen’s dues; and
(b) debts due to secured creditors
to the extent such debts rank under
clause (c) of the proviso to
subsection (1) of section 529 pari
passu with such dues,
shall be paid in priority to all
other debts.
(2) The debts payable under clause
(a) and clause’ (b) of sub-section
(1) shall be paid in full, unless
the assets are insufficient to meet
them, in which case they shall
abate in equal proportions."
"Preferential payments.
530. (1) In a winding up, subject
to the provisions of Section 529A,
there shall be paid in priority to
all other debts--
(a) all revenues , taxes, cases and
rates due from the company to the
Central or a State Government or to
a local authority at the relevant
date as defined in clause (c) of
sub-section (8), and having become
due and payable within the twelve
months next before that date;"
(Emphasis supplied) 5. Counsel for the appellant Mr. John Mathew laid stress on Sections 446, 447, 529(1) (b), 530(1) (a) besides Section 448A, 449, 451, 456(2), 457(a), 511, 528 and 529 of the Companies Act to show that the Official Liquidator is in full charge of the Company in liquidation and that the properties and assets of the company are in the custody of the Court. It was further contended that Section 530(1)(a) of the Companies Act provides for preferential payment of revenues, taxes, cases and rates due from company to the Central or the State Government or a local authority, and the Companies Act is a complete Code providing for all matters inclusive of the manner of payment of debts of the company in liquidation. According to Counsel, Section 178 of Income-tax Act, only provides for the procedure to be followed by the person incharge of the company in liquidation and information to be given to appropriate persons regarding income tax dues, and the said Section does not provide for priority of payments. It was contended that Section 178 of the Income-tax Act is only limited in its operation, and does not provide for preferential payments or priority of payments, as provided in Section 530 of the Companies Act. The argument was that Section 178 of the Income-tax Act and the relevant provisions of the Companies Act referred to herein are distinct and provide for different contingencies. If it is not so understood, and Section 178 of the Income-tax Act is interpreted as one providing for preferential payment also, it will lead to disastrous consequences and completely set at naught the scheme and the relevant provisions of the Companies Act with regard to the winding up proceedings. Since the stage for deciding for preferential payment has not reached, the Income Tax Officer had no right to call upon the liquidator to pay the amount and should wait for the stage when he can prove the claim in the winding up proceedings. The interpretation placed by the High Court on Section 178 of the Income-tax Act as if it provides for a preferential payment of income tax dues, has failed to give effect to the relevant provisions of the Companies Act and the significance of the winding up proceedings in its proper context. The High Courts of Mysore, Calcutta, Rajasthan, Gujarat and Delhi have understood Section 178 of the Incometax Act as not in any way providing for priority of payments regarding income tax dues and the view expressed by the Kerala and the Andhra Pradesh High Courts to the contrary does not lay down the correct law. On the other hand, Counsel for the revenue submitted that the decisions of the Kerala and the Andhra Praesh High Courts have given due importance to the legislative history and background leading to the enactment of Section 178 of the Income-tax Act and the crucial words contained in the section to hold that Section 178 of the Income-tax Act is a special provision and the amount which is to be set aside as per the said section, stands outside the winding up proceedings and is not available for distribution in accordance with the provisions of the Companies Act at all. Counsel for the revenue further argued that the preferential payment specified in Section 530 (1) (a) of the Companies Act and the mandate under Section 178 of the Income-tax Act behaving the Liquidator to set aside the amount notified by the Income Tax Officer, sufficient to provide for any tax which is then or is likely thereafter to become due and payable by the Company are of different import and the view taken by the Kerala and Andhra Pradesh High Courts that Section 178 of the Income-tax Act, mandating that the amount "set aside" should be first applied to the satisfaction of the tax liability, and is outside the winding up proceedings, is justified in law. It was further contended that except the Kerala and Andhra Pradesh High Courts, the other High Courts have failed to give due importance to the legislative history and background which led to the enactment of Section 178 of the Income-tax Act and the language used in the section. 6. In the judgment under appeal the High Court has referred to the legislative history and background that led to the enactment of Section 178 of the Income-tax Act, 1961. The High Court has referred to the report of the Company Law Reforms Committee which has been referred to in the decision of the Andhra Pradesh High Court, wherein the plea for priority of tax demands, particularly income tax, was dealt with and it was observed that preferential right without limit should not be conferred. The committee’s recommendations were not completely accepted by the legislature. That apart, the report of the Direct Taxes Administration Inquiry Committee was referred to (Srinivasan’s book on Income Tax Volume II, page 345), wherein necessity was pointed out, for the Liquidator to obtain tax clearance certificate or to compel him to set aside the amounts to cover the amounts due under income tax or amounts which may become due, and it was thereafter, Section 178 of the Income-tax Act, 1961 was enacted in the present form. After referring to the above materials in paragraph No. 4 of the Judgment, the Full Bench of the High Court observed, thus:
"With respect, these decisions
(Decisions of other High Courts)
fail to take note of the object and
purpose with which Section 178 of
the Income-tax Act was put into the
statute book; and the significance
and the implications of "setting
aside" of an approximate amount
needed to meet the tax liability of
the company. These have been
noticed in the Kerala and the
Andhra decisions to which we shall
refer. Before we do so, we may
briefly indicate that the effect of
Section 178(3)(b) is that the
amount "set aside" by the
Liquidator is marked off as outside
the area of the winding up
proceedings and the jurisdiction of
the winding up court. This is the
view taken by the Kerala High Court
and we are in agreement with it;" We would only add that the scope of Section 530(1)(a) is different from that of Section 178 of the Income-tax Act. Under Section 530(1)(a) all taxes which have
Act although its effect no doubt is
that the amount set aside under
sub-section (3) thereof has first
to be applied to the satisfaction
of the tax liability and in that
sense the tax liability gets
priority over the other debts of
the company in the same way as a
secured creditor who stands outside
the winding up, or whose security
’is redeemed under sub-section (4)
of section 47 of the Provincial
Insolvency Act read with section
529 of the Companies Act, gets
priority to the extent of the value
of his security. But, although sub-
section (3) of section 178 of the
Income-tax Act, which speaks of the
liquidator making "payment to
secured creditors whose debts are
entitled under law to priority of
payment over debts due to
Government" the only payment I can
think of by the liquidator to a
secured creditor who has not
relinquished his security is a
payment under sub-section (4) of
section 47 of the Provincial
Insolvency Act, or to a creditor
who, although he has to
relinquished his security, has
agreed to the liquidator selling
the property free of his
encumbrance on condition of his
being given the same charge over
the sale proceeds -- seems to
regard’ these as cases of priority,
they are really not so much cases
of priority as of the particular
asset not being available for
distribution among the creditors in
the winding up. They stand on the
same footing as, for example, trust
funds. What is really available for
distribution are the assets which
come into the hands of the
Liquidator minus the trust monies,
or the encumbrance of a secured
creditor, or, in a case falling
under section 178 of the Income-tax
Act, the amount set aside or
earmarked for the payment of the
tax. For, reading subsections (2),
(3) and (4) of that section
together there can be no doubt that
what the section does is to create
a first charge on the amount set
aside by sub-section (3) thereof
for payment of the tax that might
be admitted to proof. To say as the
liquidator has done that the amount
is set aside only for the purpose
of paying the dividends that might
be declared in respect of the tax
liability and not the entire
liability as proved in the winding
up, so that the section serves only
the limited purpose of ensuring
that the assets of the company are
not distributed beyond recall
without reserving sufficient funds
for the payment of dividends in
respect of the tax liability which
might not yet have been determined,
and therefore not proved, is hardly
in keeping with the wording of the
section defective though it be.
Sub-section (2) of the section, it
may be noted, speaks of the tax
payable by the company, and, sub-
section (4), of the payment of the
tax on behalf of the company, not
of the dividends payable in respect
of the tax liability. What the
section contemplates is the payment
of the tax eventually found due out
of the amount set aside, not the
payment of dividends in respect of
the tax eventually found due. And,
if this brings the section into
conflict with section 530 of the
Companies Act, the section must
prevail by reason of sub-section
(6) thereof -- the question why
income-tax alone of all Government
dues should ride this high horse is
not for me to answer. But, for the
purposes of section 530 of the
Companies Act, the tax liability is
an ordinary and not a preferential
claim and it is only out of the
amount set aside under sub-section
(3) of section 178 of the Income
tax Act, that the Revenue can claim
payment of its debt to the
exclusion of other creditors." And the Division Bench in A.S. No. 225/1968, affirming the above decision, observed thus:
"............... we cannot ignore
the provision in sub-section (2) of
section 178 that the amount to be
notified is not only the amount for
which preference is given under
Section 530 of the Companies Act,
1956 but the entirety of the
income-tax dues of the company
including that which may thereafter
become payable. When we read this
provision with the provision in
sub-section (4) of section 178 of
the Act which makes Liquidator
personally liable for the payment
of the Tax which the company would
be liable to pay if the Liquidator
failed to give notice in accordance
with sub-section (1) of Sec. 178,
it, appears to us that the
provision in Sec. 178(3) imports
much more than that was contended
by Counsel for the appellant. This
is the view that has been taken in
the judgment under appeal which, if
we may say with great respect,
deals with all aspects in a few
sentences. We respectfully agree
with the view taken by the learned
Judge." Approving the above dicta, the Full Bench has further laid stress on the crucial words occurring in Section 178 (2), 178 (3)(b) of the Income-tax Act, which behaves the Official Liquidator to "set aside the amount" equal to the amount notified by the Income Tax Officer and held that these words mean "keeping separate for special purpose" and the words "set aside" or "set apart" are synonymous with the word "appropriate". The Full Bench has observed in paragraph 6 of the judgment thus:-
"The shades of meaning thus
attached to the expression ’set
aside’ convey the idea of an
appropriation or an allocation of
the income-tax dues; with the
result, that it stands outside the
winding up by the Company Court an
idea suggested in the judgment of
Ag. Chief Justice Raman Nayar,
confirmed by the Division Bench." The Andhra Pradesh High Court in the decision reported in I.T.O. v. Official Liquidator, 101 ITR 470, has taken a similar view. We are of the opinion that the judgment of the learned single Judge of the Kerala High Court I.T.O. v. Indian Traders Bank Ltd., 1968 KLT 595, affirmed in A.S. No. 225/68 and approved by the Full Bench in the judgment under appeal as also the decision of the Andhra Pradesh High Court in I.T.O. v. Official Liquidator, 101 ITR 470, lay down the law correctly. On a total view of the relevant statutory provisions, it appears to us, that the Income Tax Department, is treated as a "secured creditor". The decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts have failed to give due importance to the legislative history and background that held to the enactment of the section and the crucial words occurring in Sections 178(3) and 178(4) of the Income-tax Act to the effect that the Official Liquidator "shall set aside" the amount notified by the Income Tax Officer and if it is not so done, the Official Liquidator is personally liable to pay the amount of tax which the company would be liable to pay. It should be remembered that Section 178 of the Income-tax Act occurs in Chapter XV of the Act. The object sought to be achieved by the provisions in the said Chapter is "to fasten liability to pay the tax" on the income received and to catch the income at the earliest point of time and tax the same where it is found, instead of waiting for long. We, therefore, hold that the judgment under appeal does not merit interference by this Court. 8. During the course of hearing, our attention was drawn to Section 17 of the Central Sales Tax Act, 1956 which is similar to Section 178 of the Income-tax Act, 1961. We are of the view that the interpretation placed by us on Section 178 of the Income-tax Act, should govern cases arising under Section 17 of the Central Sales Tax Act, 1956 as well. But, a situation may arise where the authorities under both the Acts (Income-tax Act as well as Central Sales Tax Act) send similar orders to the Official Liquidator, in which case the question of precedence may arise. In our opinion, in such cases, the priority shall be with respect to the date of receipt of the orders by the Official Liquidator. 9. We affirm the judgment under appeal. This appeal is without merit and is, therefore, dismissed. There shall be no orders as to costs.